How to Calculate Depreciation for Plant and Machinery
Depreciation is a real cost of owning plant and machinery — if you ignore it in your project costings, you are underpricing your work. This guide explains the three depreciation methods, the formula for each, and how to apply the correct rates for plant and equipment.
Depreciation is the systematic allocation of an asset's cost over its useful life. For engineers and project managers, it matters in two ways: as a cost in financial accounts (reducing profit) and as a cost in project or job costings (ensuring machinery time is priced correctly).
If you own a CNC machine worth ₹40 lakh and ignore depreciation, you are undercharging every job that uses it — until the day it needs replacing and you have no funds set aside.
Method 1: Straight-Line Method (SLM)
The simplest and most common method. Equal depreciation every year.
**Annual Depreciation = (Cost – Residual Value) / Useful Life (years)**
Or as a rate: **Depreciation Rate = 100% / Useful Life**
Example: - CNC machining centre cost: ₹40,00,000 - Estimated residual (scrap) value: ₹2,00,000 - Useful life: 10 years - Annual depreciation = (40,00,000 – 2,00,000) / 10 = **₹3,80,000 per year** - Hourly depreciation (2,000 operating hours/year) = 3,80,000 / 2,000 = **₹190 per hour**
This hourly rate should be included in your machine cost rate for job costing.
| Asset | Useful Life (SLM) | SLM Rate (%) |
|---|---|---|
| General plant & machinery | 15 years | 6.67% |
| CNC machines / machining centres | 10 years | 10.0% |
| Electrical installations | 10 years | 10.0% |
| Computers & servers | 3 years | 33.3% |
| Motor vehicles | 8 years | 12.5% |
| Office furniture & fixtures | 10 years | 10.0% |
| Buildings (factory) | 30 years | 3.33% |
Method 2: Written Down Value Method (WDV)
Higher depreciation in early years, lower in later years. Also called declining balance method. Used under the Companies Act 2013 (India) and common for tax purposes.
**Depreciation = Book Value at Start of Year × WDV Rate**
WDV Rate formula (derived from useful life): **WDV Rate = 1 – (Residual Value / Cost)^(1/n)**
Example with the same CNC machine: WDV Rate = 1 – (2,00,000/40,00,000)^(1/10) = 1 – 0.05^0.1 = **25.9% per year**
| Year | Opening Book Value (₹) | Depreciation @ 25.9% (₹) | Closing Book Value (₹) |
|---|---|---|---|
| 1 | 40,00,000 | 10,36,000 | 29,64,000 |
| 2 | 29,64,000 | 7,67,676 | 21,96,324 |
| 3 | 21,96,324 | 5,68,848 | 16,27,476 |
| 4 | 16,27,476 | 4,21,516 | 12,05,960 |
| 5 | 12,05,960 | 3,12,344 | 8,93,616 |
| 6 | 8,93,616 | 2,31,447 | 6,62,169 |
| 7 | 6,62,169 | 1,71,501 | 4,90,668 |
| 8 | 4,90,668 | 1,27,083 | 3,63,585 |
| 9 | 3,63,585 | 94,169 | 2,69,416 |
| 10 | 2,69,416 | 69,749 | ~2,00,000 (residual) |
Method 3: Units of Production Method
Depreciation based on actual usage — ideal for equipment whose wear depends on production volume rather than time.
**Depreciation per Unit = (Cost – Residual Value) / Total Estimated Units of Production**
**Annual Depreciation = Depreciation per Unit × Units Produced This Year**
Example — a press machine: - Cost: ₹15,00,000 | Residual: ₹1,00,000 | Total life: 500,000 cycles - Depreciation per cycle = 14,00,000 / 500,000 = **₹2.80 per cycle** - Year 1 actual production: 45,000 cycles - Year 1 depreciation = 45,000 × 2.80 = **₹1,26,000**
This method is more accurate for project job costing because depreciation directly tracks productive use.
Depreciation Rates Under Companies Act 2013 (India)
Schedule II of the Companies Act 2013 prescribes useful lives for calculating depreciation. Companies must use these for statutory financial reporting.
| Asset Class | Useful Life (years) | WDV Rate (approx.) |
|---|---|---|
| Plant & Machinery — general | 15 | 18.1% |
| Plant & Machinery — continuous process | 25 | 11.3% |
| Electrical installations | 10 | 25.9% |
| Laboratory equipment | 10 | 25.9% |
| Office equipment | 5 | 45.1% |
| Computers & data processing | 3 | 63.2% |
| Motor cars | 8 | 31.2% |
| Factory buildings (RCC) | 30 | 8.7% |
Using Depreciation in Project Costing
When costing a project that uses your own machinery and equipment, include the depreciation cost as part of your equipment rate. This ensures every job contributes to asset replacement.
**Machine Hour Rate = (Depreciation + Maintenance + Power + Operator cost) / Annual Operating Hours**
Example for a 55 kW CNC lathe: - Depreciation: ₹3,80,000/year - Maintenance (3% of cost): ₹1,20,000/year - Power (55 kW × 0.75 utilisation × 2,000 hrs × ₹8/kWh): ₹6,60,000/year - Operator (₹3,00,000/year) - Total: ₹15,60,000/year ÷ 2,000 hours = **₹780/machine-hour**
In your project cost estimate, charge every machine-hour at ₹780 — this covers all ownership and operating costs.